Heritage Bank of Central Illinois entered into a consent agreement with the Federal Deposit Insurance Corporation (FDIC) and Illinois Department of Financial and Professional Regulation on November 2, 2009.

Regulators charged the bank with “unsafe or unsound banking practices,” including “[o]perating with an inadequate level of capital protection for the kind and quality of assets held,” “[o]perating in a manner which has resulted in inadequate earnings and losses to the institution,” “[e]ngaging in hazardous lending and lax collection practices,” and “[o]perating with an inadequate loan policy.” Heritage Bank neither admitted nor denied the charges, but did agree to modify its practices as outlined in the consent agreement.

I asked Heritage Bank for their comment and received an e-mail from president M. Scott Hedden (reprinted at the end of this post). It basically says that regulations have been tightened on all lending institutions in the aftermath of the sub-prime mortgage crisis, even though most of the sub-prime loans came from non-bank lenders. These “onerous” regulations are making it harder for the bank to help their loan customers resolve “financial challenges and hardships” brought on by the “current economic climate.”

In other words, what the bank calls “helping customers resolve financial challenges,” regulators call “hazardous lending and lax collection practices.” To use the movie “It’s a Wonderful Life” as a metaphor, Heritage Bank is George Bailey and the regulators are Mr. Potter. Remember this exchange?

MR. POTTER: Have you put any real pressure on these people of yours to pay those mortgages?
PETER BAILEY: Times are bad, Mr. Potter. A lot of these people are out of work.
POTTER: Then foreclose!
BAILEY: I can’t do that. These families have children.
POTTER: They’re not my children.
BAILEY: But they’re somebody’s children, Mr. Potter.
POTTER: Are you running a business or a charity ward?

No doubt the truth is somewhere in between. There are probably some banking practices that really do need to be improved at Heritage Bank, while at the same time it’s true that regulators often get carried away, especially in times of crisis (witness the security excesses at airports these days).

The bottom line is that improvements are being made. Mr. Hedden says “the bank has already implemented and achieved many of the requirements contained in the Agreement. Most significantly, the bank has already met and exceeded the capital requirements set forth in the Agreement by raising capital through private, local investors.”

Below is the e-mail I received from M. Scott Hedden, President/CEO of Heritage Bank of Central Illinois:

Mr. Summers,

Thank you for contacting us regarding the Consent Agreement a/k/a Order to Cease and Desist (“Agreement”) that was entered into, on November 2, 2009, with our regulators, the Illinois Department of Financial and Professional Regulation (“IDFPR”) and the Federal Deposit Insurance Corporation (“FDIC”), as a result of our May 2009 regulatory examination. Before I comment on the Agreement I would like to give you a little background on us.

Heritage Bank of Central Illinois is a locally owned and managed community bank that has been serving the Peoria area for since 1920. As a community bank, we are a reflection of our customers and our market. While we did not participate in the risky investments or practices of Wall Street, we have shared in the many challenges faced by Main Street. We have been and continue to be an active lender and investor in our local community. In fact, Heritage Bank is one of the few banks in the state that has been recognized for its outstanding commitment to “community reinvestment” as indicated by the “Outstanding” Community Reinvestment Act Rating which has been awarded to us repeatedly by the FDIC. However, in the current economic climate a number of our loan customers have experienced financial challenges and hardships, and we are working diligently with these customers to help them resolve those challenges. We continue to do this despite the difficult regulatory environment in which all banks now operate. This onerous environment was recently detailed by U.S. House of Representatives Finance Committee Chairman, Barney Frank in a letter to all Federal Banking Regulators dated October 29, 2009 (copy attached).

Regarding the Agreement, the IDFPR and FDIC have identified several areas that they want the bank’s Board of Directors to address to improve the condition of the bank, and have required that certain steps be taken to accomplish that goal. The bank’s Board of Directors is in agreement with the requirements, and in fact the bank has already implemented and achieved many of the requirements contained in the Agreement. Most significantly, the bank has already met and exceeded the capital requirements set forth in the Agreement by raising capital through private, local investors. This action will ensure that Heritage Bank of Central Illinois will remain an independent, locally owned and managed community bank dedicated to continuing to serving the Peoria area for many years to come. All other requirements have been addressed and are being complied with. Despite the presence of the Agreement and the lingering effects of the recession, we will continue to provide the innovative products and first class service that our customers have come to expect from us.

Mr. Summers, thank you again for contacting us regarding the regulatory consent agreement, and giving us the opportunity to comment. If you have any additional questions please contact me at [contact info redacted].

Sincerely,
M. Scott Hedden
President/CEO
Heritage Bank of Central Illinois